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Birth of a Hidden Champion: Cub Elecparts and You Shan Quan 尤山泉


Dear Clients and Partners,

Birth of a Hidden Champion (Issue 3): Cub Elecparts and You Shan Quan 尤山泉

Welcome to the third issue of the “Birth of a Hidden Champion” tribute series, where we highlight inspirational stories on the listing birth of Hidden Champions creating and compounding value in the Asian capital markets.

On the 16th of November 2010, a Hidden Champion was born in the Taiwanese capital market. Cub Elecparts Inc (TSEC:2231), led by the innovative and resilient founder You Shan Quan 尤山泉, went on to compound nearly 400% to a market value of nearly US$1 billion today.

In an article written earlier in March/April 2017, we reviewed this global leader in Tire Pressure Monitoring Systems (TPMS) in the automotive aftermarket segment to identify how a leader with an insurgent mission can ignore its naysayers and persevere to build a wide-moat scalable business, resulting in a leading global market share in TPMS.

Asian Wide-Moat Company: Global Aftermarket Leader in Automative Tire Pressure Monitoring System (Excerpts)

This month in March/April 2017, we investigate Cub Elecparts (TSEC: 2231), the global leader in Tire Pressure Monitoring System (TPMS) in the automotive aftermarket segment with its two sensor SKUs (Uni-Sensor: 315MHz & 433 MHz), which has 98% coverage ratio in all types of cars, the highest compatibility in the world, enabling tire shops and aftermarket operators to reduce inventory and free up working capital and replacement work using CUB’s universal TPMS sensor product is quicker and easier for onsite technicians. CUB is also the exclusive OEM supplier to Wal-Mart since 2015. In North America, CUB claims 50% market share in standalone auto tire shops and in regional auto tire chain stores. CUB will benefit from car safety regulations which required Advanced Driver Assistance System (ADAS) to be fitted in new cars in the US (2007) and Europe (2012) with more countries following suit.

Cub Elecparts started from manufacturing automobile switches, which include those for dimmers and headlights, power windows, ignition and combination switches. The company expanded into automobile sensors in 2000, producing sensors for oil pressure, crankshaft position, camshaft position and vehicle speed. It leveraged its knowledge base in automotive sensors to break into the TPMS manufacturing in 2003. After years of efforts, CUB launched the first generatio∆n of its TPMS products in 2008, and the successful breakthrough third-generation universal TPMS in 2013. With the acquisition of microwave vehicle radar specialist in Jan 2016, CUB looks to expand into the multi-billion Advanced Driver Assistance System (ADAS) market and will start shipping its first ADAS solution in July 2017 from its automated production line in Shanghai Pudong plant. CUB will also launch its advanced 77 GHz radar sensors in 3Q to 4Q 2017 and commit to mass production in 2018. At present, CUB is working with 2 automotive clients for this advanced 77 GHz radar sensor products, including targeting the Japanese truck market. The founder’s family is the biggest shareholder with 52.2% stake.

We are impressed by CUB’s founder and CEO SC Yoo’s dedication, patience and focus in not only building up a Tier-1 supplier capability in its original non-TPMS switches and sensors business that expanded into the breakthrough unique patented universal TPMS product but also in forging a corporate culture that feels like an enterprise of engineers, reminding us of automotive parts innovator Gentex (GNTX US)/John Bauer which compounded 190-fold to $6bn market cap. We like how CUB has consistently reinvested back into the business to develop its R&D and new product innovation capabilities, as well as making tough strategic business decisions in focusing on the automotive aftermarket and R&D of the universal TPMS while avoiding the China TPMS market. CUB has proven to be focused and farsighted in stayed ahead of the game by building up new products beyond its automotive sensors and TMPS in the new ADAS solution segment that is now building up sales momentum as well as set CUB on a long-term growth trajectory path in the race towards the autonomous car.

Below are excerpts of founder Yoo’s inspiring entrepreneurial story:

“2003, when I went to America to pay a visit to automotive component giant Lear who is also one of our customers, I saw a production line doing TPMS. The Chinese auto engineer who showed me around shared with me that America is going to pass a legislation for the mandatory adoption of TPMS which will be a standard component in all new cars. I thought instinctively then that a great business opportunity has arrived. Whether I will succeed or not, I do not know but I have to try. In 2005, America passed the law in mandatory TPMS installation and EU, Korea, Japan, China followed suit. Every time a tire is replaced, the TPMS needs to be replaced too. Even if the tire is not replaced, the TPMS also needs to be replaced. This is because the battery lifespan is only 5 to 7 years and the battery cannot be replaced and hence the entire TPMS needs to change. This is another big market just like the tire market.

At that time, I was thinking to myself that this is entirely different from what we have been doing in car switches as the car can break down but the car switch hardly gets damaged. I was thinking hard on how we can achieve a breakthrough from this bottleneck imposed by the durability of the product lifecycle and the low replacement rate by the customer. My thinking was simple, to focus on becoming the best and number one player, as long as we keep growing our customers even in this low replacement car switch, we can still do well. So we devoted our resources to developing molds, which has grown from 70 sets in 2007 to over 1,300 sets now. This mold capability know-how that was acquired and accumulated over the years has also helped our development of the universal TPMS product.”

When I was in Detroit discussing and negotiating new product development with General Motors, I was thinking aloud to myself that every year there are hundreds and thousands of new car models by various car makers and my first generation TPMS can only cope with around 10 car models. If only there is a universal TPMS product that can be used in all car models, I shared my thoughts with the aftermarket industry folks. They agree, commenting that there are too many variety out there and when they are servicing their customers’ cars, every car has different TPMS and they are like a locksmith who must carry hundreds of keys which is heavy, burdensome and tiring. What the aftermarket operators describe as carrying hundreds of keys is a reality in the real world in that the auto mechanic shop has to carry a lot of TPMS product inventory of different variety, tying up precious working capital, and when the mechanic is replacing the new TPMS, a lot of time is expended as every car model is different in the TPMS installation.

During 2010 and 2011, CUB faced a lull period without any shipments of our first and second generation of TPMS products. Yet we persisted in our R&D efforts. By the end of 2012, when we are certain that our third generation TPMS product has achieved a coverage that exceeds 98% of car models, we decided to officially launch the universal TPMS product in the market in 2013. 98% coverage means that when the market has a new car model, the tire shop and auto mechanic outlet only need to refresh the new code online. Schrader, the leader in Original Equipment (OE) TPMS, only has coverage of around 80%. Having the patent in the universal TPMS decoder means having a master golden key to open the door to all auto manufacturers original TPMS.

This competitive edge in universal applicability has widen our lead substantially against our competitors. However, people will not know that we have invested ten years of R&D efforts since 2003 to sharpen this sword, enduring all sorts of ridicule heaped upon us by the industry, laughing at me that I will bring the company to bankruptcy. During this long painful process, the snide and criticisms from the industry players never ceased. They all said that this small little factory wants to do R&D, how can they ever hope to compete with the world’s number one TPMS OE company? If they continue to waste money developing this TPMS, they will definitely go bankrupt. When we have our breakthrough product, even Schrader took the initiative to visit us to negotiate a contract and became our customer. The world’s two largest TPMS diagnostic tools companies BATEC and ATEQ also proactively looked for us to discuss about a strategic alliance.

This success is not gambling luck but due to foresight and persistence. When you have a focused target, you must persist all the way to the end! Our TPMS system has combined the applications in GPS, mobile, rear camera vision in blind detection system (BSD), winter tires, TPMS for trailers and semi-trailers (18- to 22-wheelers), a dash cam with integrated TPMS, advanced driver assistance system (ADAS), and so on. Our core values is once we have found the right path, we will persist in the journey to press onward.”

What Makes It a Wide-Moat Business? Fundamental Dynamics Behind 49.4% ROE

  • (1) Unique patented universal TPMS with highest 98% coverage: While there are more than 200 types of TPMS on the market, CUB’s patented universal sensor products are able to cover and replace 98% of the TPMS products (OE sensor) available through integration and recoding technologies providing car profiles including brands and mileage, therefore relieving retail channel’s inventory pressure and also making the replacement process quicker and easier for on-site technicians.
  • (2) Attention to details to solve problems faced by underserved aftermarket customers and translate customer insights to continually develop superior product: The history of CUB follows a timeline of product innovations in solving problems by paying attention to the details and understanding the market and customer needs at the grassroot level. Some of the patented innovations include developing a universal TPMS that is also mounted on a patented screwed valve, in which the angle can be adapted to the rim within the range of 0 to 30 degrees to suit most aluminium and steel rims. Replacement work is quicker and easier for onsite technicians and mechanics.
  • (3) Leadership in automotive aftermarket with customer stickiness: CUB offers its RF coding devices to retailers for free as an incentive to sell its TPMS sensor while CUB’s competitors usually around US$2,000-US3,000 for the tool. Free updates are also provided to the customers while competing products charges update fees of US$150-250 per year. CUB also provides on-call service and over 2,000 training per year while aftersales service is practically none for competing peers.
  • (4) Leveraging deep intangible know-how in R&D and engineering capabilities to create new categories of growth from TPMS to ADAS: We like how CUB has leveraged its knowledge base in automotive sensors to break into the TPMS manufacturing in 2003. After years of efforts, CUB launched the first generation of its TPMS products in 2008, and the successful breakthrough third-generation universal TPMS in 2013. Noteworthy is its commitment to developing and investing in its mold capability know-how and asset base, which has grown from 70 sets in 2007 to over 1,300 sets now. This mold capability know-how that was acquired and accumulated over the years has helped CUB’s development of the universal TPMS product. This mold asset has also been important in helping to generate stable profitability of CUB’s non-TPMS product segment of varied but low volume orders items as a Tier 1 OE supplier with customers such as Chrysler, General Motors.

Warm regards,

KEE Koon Boon | Chief Investment Officer & CEO

Hidden Champions Fund

www.hiddenchampionsfund.com

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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